Coworking in 2023 – Flexibility in Turbulent Times

We’re barely past the perfect storm for the coworking and flex space industry and already heading into most likely the biggest recession of our times. With traces of inflation, spiking interest rates, and low office occupancy, what’s the future of Coworking looking like in 2023?

It’s looking great but difficult! Let’s explore the opportunities, the challenges, and the strategies that can help you get through these turbulent times stronger than ever!

I’m pleased to share my thoughts with commentary and insights from the industry legend, Hector Kolonas, co-founder at Syncaroo!

Demand for Coworking and Flex is on the Rise

There are a lot of data points and reports that clearly show that demand for coworking and flex spaces is on the rise. Historically, serviced offices have always been doing better in recessions because companies need more flexibility in difficult times.

Now, if we put the post-covid desire for greater flexibility, companies of all sizes have even more reasons to seriously consider flex. In fact, flex is becoming a key workplace strategy for many multinationals around the globe.

What can you do to capture that demand?

• Product & Positioning – make sure that your workspace products are secure, compliant, and reliable! You can’t afford to have shaky internet connectivity or your access control systems are not in place. Also, make sure all your marketing collateral clearly points out that you’re enterprise-ready! Some of the best coworking spaces in the USA already follow that approach.
• Follow the Demand – oftentimes, larger companies will come through partners, like an office broker, an online broker, or a marketplace network. Make sure you establish and nurture these partnerships sooner rather than later!
• Be the Expert – companies across the world are looking for experts to help their organization manage a hybrid work strategy. Be the ultimate authority when it comes to returning to the workplace in an efficient way. Guide them to the correct products and services that make sense for their needs.

Note: The Nov 2022 FlexIndex  has fully recovered to 5.1 points and it’s now above the Average of Flex Space utilization in 2019 (5 points)!

Hector: On both a macro- and microeconomic level and across rural, suburban and urban areas, it does appear that demand for flex options is growing.

What’s interesting to note here is how that interest converted into leads, sales, and oftentimes memberships. In 2022 we saw a 7x increase in converting leads via aggregators and booking apps, and an almost 6x increase in closed deals via human brokers when compared to 2021. I do expect these numbers to keep growing, even as some firms began drawing back the autonomy of workspace selection they gave to individuals and teams in the latter quarters of this year.

Where we’re seeing a lot of work being done is on optimizing processes and workflows to improve overheads of servicing multiple methods of space utilization, making on-demand, meeting rooms and day/half-day passes more profitable. As those optimizations kick in, I think we’ll see interesting growths in promotion and leverage of these types of access, much like we’d seen with virtual mail offerings over the last 3-5 years.

Landlords are becoming a Coworking Key Growth Driver

In many regions around the world, we see that demand for flex actually exceeds the supply. There’s a clear opportunity for growth in the coworking and flex space industry.

Also, there’s a very interesting party that’s hugely interested in our industry for many reasons – the Landlords, short for Property Management companies and Asset Owners.

Our internal data analysis shows that more than 55% of all new coworking locations that came to market in 2022 are driven one way or another by a Landlord. It’s not surprising though. In fact, we expect this number to get even closer to 80% in 2023. Here’s why it’s a win-win for all parties:

• Landlords have available space assets that they can put to good work in flex. In fact, it’s unclear if they can put them into the traditional office market anyway. Or anything else but flex!
• Landlords have financial assets and the construction partners to do the fit-out of the space more effectively.
• Coworking Operators have the brands and the operational capabilities to pull out a successful flex offering.
• Coworking Operators have the growth mindset and abilities to drive demand for flex.

It’s a match made in heaven. We’re seeing massively successful landlord-operator partnerships lately (called Management Agreements).

If you’re not building these relationships with the top Landlords in your regions, you’re missing a big opportunity here!

Hector: This is an area I’ve been watching closely, both through our work at Syncaroo and also by following some of the undercurrent trends I’ve been following in my weekly coworking newsletter. Miro has covered great points above, but there are two other landlord-related opportunities I’d like to highlight to operators for 2023.

1. Coworking franchising is maturing, with both established players and new mergers creating hotel-like multi-flag offerings. This presents a few growth opportunities for experienced operators who may be interested in exploring or servicing franchised spaces/brands.
2. “Other” landlords are looking at flex too. A lot of landlord partnerships look at owners of office space, but from what we’re seeing, there’s a growing desire for flex options and understanding from landlords in other real estate verticals too. From retail to industrial and even multi-family residential who are looking for sticky offerings that drive constant footfall and drive up the value of another real estate within the same and surrounding buildings.

Profitability is more Important than Ever

Profitability is sexy again!

In fact, it’ll be the most important element of a coworking business in 2023. Or, well, any business. A dollar today is better than a dollar tomorrow. The interest rates will be growing slowly and steadily for many months. Risk-free government bonds will yield 5-5.5% and almost risk-free corporate bonds are at 8-9%. You need to beat that in order to be an investible business and that’s not easy if you’re not profitable. You need to be growing nicely and also turning a profit in 2023!

Most recessions recede in 18 months, however, no one knows for how long we will be in this one. Our advice is to buckle up and optimize for efficient growth and profitability. Put your EBITDA hat on and go after these optimizations.

Hector: An economic downturn and sustainability are two topics on the minds of both industry insiders and observers. Here’s where it gets tricky too though, especially when following the ‘playbook’ for surviving dips in the economy. The “quickest” way to improve profitability is to decrease expenses, usually by cutting spending on marketing, technology, and staff. The trick here is to spend strategically, instead of not spending at all. To focus time and resources on the most profitable areas requires setting up delegation and processes to handle, track and react to both internal and external market shifts.

For example, if your local government invests in bringing new employers to your area, are you equipped to find out and leverage this opportunity by quickly shifting your team’s focus? What if local competitor/friendly spaces need to close in a hurry? With office valuations in flux, could long-term savings be realized or locked in by keeping an eye and ear on local landlords? All, or none, of these, may come up during a recession, but if your systems and team are not ready to move fast, or are just burned out, someone else may snap up the opportunities, and longer-term profits before you can react.

Less > More

Less is more! That’s a universal truth but in challenging times, it resonates even better. Our advice for 2023 is to stay focused on your key offerings, make them 10x better and reduce distractions. For example, the two big distractions we’re often seeing in our industry are:

• Offering way too many product and service variations. Optionality is good but it also creates an enormous management overhead and distraction from the key growth drivers. Make your core products 10x better instead of offering hundreds of options.
• Building internal tech solutions. That one is specifically painful as it’s not just a huge operational overhead, a distraction, but also a financial rabbit hole. Let’s zoom into it.

Let’s imagine you want to build your tech stack from the ground up. In order to do that, you need the following team: 10 developers,  2 QAs, 4 tech support, and 2 PMs. The total cost of running such a team is in the range of $1.5m to $2m per year. You can potentially do it with half this team but it’ll be very difficult to make any meaningful progress. The simple math also tells us that you need to run more than 400 locations to justify a cost of $1.5m / year ($300 per location per month). The good news is that you don’t need sales and marketing as traditional software companies do. You don’t need to spend a ton of money on customer acquisition as all your new locations will ‘buy’ your product. Which is great! Or is it?

If you are somewhat familiar with how the market economy works, you should know that this is not good. It’s in fact, really bad. I was born in a centrally planned economy and I can tell you for sure that it does not work. It creates the worst products that you can imagine. Every time. Why? Because you have a “sure” market. Why should you make your product better if they’ll buy it anyway?

Instead of this massive overhead of building your own platform, you can just subscribe to the best coworking management software on the market and run with it.

Don’t get distracted!

Go and build these relationships with landlords and brokers. Optimize for efficiency, growth, and profitability! The market is up for a grab!

Hector: Absolutely agree with the notion that less is more, especially given the topics we’ve touched on above. It also highlights two apparently contradictory trends we’re seeing (which in actual fact are more connected than initially meets the eye).

The first is that operators want optionality on what technology they test and implement into their spaces. Platforms like OfficeRnD are spearheading this ‘modular stack’ by making it easier and easier to connect more and more apps, platforms, and services together. Expect to see more talk about integrations, and their core benefits around member experience and optimized operators throughout 2023.

The second is data and its yet-untapped power. Not only did we discuss this recently on a panel alongside other product leaders this year, but this is a topic that’s come up again and again in calls, masterminds, and implementation sessions with operators (and their landlords) around the world. In 2023, you’re going to see more focus on bringing as much operational data into a centralized place, and then doing ‘creative’ things with it like predictive analyses, optimizing expenditure, improving ESG objectives, and more. 

What’s most interesting is that both of these sit side-by-side, when using the right tech platforms and “glue” to keep things in sync.

Excited to continue seeing (and supporting) operators shifting towards data-led, flexible and quick-moving models allowing them to make the most of the opportunities 2023 may present.